Income Tax Act, 1961

The Income Tax Act of 1961 is a comprehensive statute that governs the taxation system in India, outlining the obligations, exemptions, and procedures associated with income tax on individuals and corporations. This act is pivotal for anyone earning income within India, as it provides the framework for tax liabilities and potential deductions one can claim. In the context of home purchases, the act includes specific provisions that can be beneficial for homeowners.

For instance, it offers tax relief on mortgage interest payments and principal repayments under various sections, which can make buying a home more affordable. Therefore, understanding the intricacies of the Income Tax Act can significantly impact your financial planning, particularly when considering the purchase of a home through a home loan. Knowing how to navigate these tax benefits can lead to substantial savings, making it crucial for potential homebuyers to familiarise themselves with these aspects before securing financing for their home.

New Income Tax Bill 2025 - Updates

A new Income Tax Bill was presented in parliament on February 13, 2025. This bill replaced the existing Income Tax Act, which had been in use for many decades.

Through this bill, the government tried to make the law simpler and easier for everyone to understand (both for taxpayers and the tax department).

For those unaware, the old Income Tax Act had 298 sections, 23 chapters, and 14 schedules. However, the new bill has expanded to 536 sections, 23 chapters, and 16 schedules. At first, this may seem like the law has become longer. However, the actual number of pages has come down from 890 pages in the old law to only 622 pages in the new one.

Now, if we talk about the key changes, the new act has removed the terms “Assessment Year” and “Previous Year,” which were often confusing for many taxpayers. In the new bill, all the rules will be based on the “Tax Year,” which is the same as the Financial Year (from 1st April to 31st March).

Additionally, our honourable finance minister said the new law is written in a simpler style. It has fewer words and shorter sentences. The main goal of this bill is to:

• Reduce confusion

• Ease compliance

• Avoid litigations between the tax department and taxpayers

Easy-to-understand provisions will also bring more clarity for individuals and businesses while filing taxes.

What is the Income Tax Act 1961?

The Income Tax Act, 1961, is the central law that explains how income tax is collected in India. It tells us:

• Who should pay income tax?

• How much to pay?

• When to pay?

• How will the government collect it?

This law is used by the Income Tax Department to calculate and collect taxes from individuals, businesses, and companies. The current law has 298 sections and 23 chapters. They cover all rules related to:

• Income

• Exemptions

• Deductions

• Penalties

• Refunds

Additionally, the Income Tax Act is a direct tax law. This means the person who earns the money pays the tax directly to the government based on their income.

Chapters of the Income Tax Act 1961

The Income Tax Act, 1961, is divided into 23 different chapters. Each chapter covers a different part of the law, like:

• Who needs to pay tax?

• How is income calculated?

• What deductions are allowed? and more

Some chapters are further divided into sub-parts to explain the rules more clearly. For your reference, an overview table has been added below covering all the chapters:

Chapter	Overview
Chapter I	An introduction of the Income Tax Act and its overview.
Chapter II	The beginning and scope of the IT Act.
Chapter III	Income that does not form a part of the total income.
Chapter IV	How is total income calculated?
Chapter V	Other income sources of individuals which form a part of the assessee’s income, like capital gains, businesses, properties and more.
Chapter VI	Aggregation of income, carry forward of loss and set off.
Chapter VIA	Deductions applicable while calculating total income.
Chapter VIB	Restriction on specific deductions for companies.
Chapter VII	Parts of total income on which income tax is not applicable.
Chapter VIII	Applicable rebates and reliefs while calculating income tax.
Chapter IX	Contains information on double taxation relief.
Chapter X	Special cases in which assessees do not have to pay income tax.
Chapter XA	General anti-avoidance rules for income tax.
Chapter XI	Additional tax implications on undistributed profits.
Chapter XII	Rules of tax calculation in special cases.
Chapter XIIA	Special rules on certain Non-Resident Indian (NRI) income.
Chapter XIIB	Special tax provisions for certain companies.
Chapter XIIBA	Special tax provisions for certain limited liability partnerships.
Chapter XIIBB	Special tax rules when the Indian branch of a foreign bank gets converted to a subsidiary company.
Chapter XIIBC	Special tax rules for companies which are resident in India.
Chapter XIIC	Special tax rules for retail trade.
Chapter XIID	Special tax rules for the distributed profits of domestic companies.
Chapter XII DA	Special tax rules for the distributed income of domestic companies for buying back shares.
Chapter XIIE	Special tax rules for distributed income
Chapter XIIEA	Special tax rules for distributed income by securitisation trusts.
Chapter XIIEB	Special tax rules for accredited income of specific institutions and trusts.
Chapter XIIF	Special tax rules for income from venture capital funds and venture capital companies.
Chapter XIIFA	Special tax rules for business trusts.
Chapter XIIFB	Special tax rules for the income of investment fund schemes and the income received from them.
Chapter XIIG	Special tax rules for the income of shipping organisations.
Chapter XIIH	Tax implications on fringe benefits.
Chapter XIII	Information of Income Tax Authorities.
Chapter XIV	Procedure of income tax assessment.
Chapter XIVA	Special rules for avoiding repeated appeals.
Chapter XIVB	Special rules for assessing search cases.
Chapter XV	Tax liabilities in special cases.
Chapter XVI	Special tax rules applicable to firms.
Chapter XVII	Rules of tax collection and recovery.
Chapter XVIII	Tax relief on dividend income in specific cases.
Chapter XIX	Tax Refunds.
Chapter XIXA	Case settlements.
Chapter XIX-AA	Role of Dispute Resolution Committee in specific cases.
Chapter XIXB	Advance rulings.
Chapter XX	Appeals and revision.
Chapter XXA	Immovable property acquisition in special cases of transfer to prevent tax evasion.
Chapter XXB	Mode of accepting payments or repayments in special cases in order to counteract tax evasion.
Chapter XXC	Buying of immovable property by the central government in certain transfer cases.
Chapter XXI	Imposable penalties.
Chapter XXII	Punishable offences and prosecutions.
Chapter XXIB	Certificates of tax credit.
Chapter XXIII	Miscellaneous.

 

Do you want to read more about what is written inside each chapter of the Income Tax Act, 1961? You can download the full document in PDF format. This document is available on the official website of the Income Tax Department of India. It gives complete details about all the tax rules and sections.

Provisions of Income Tax Act 1961

The Income Tax Act, 1961, governs taxation in India and includes key provisions such as:

1. Tax slabs: Specifies income brackets and corresponding tax rates.
2. Deductions: Allows deductions under various sections like 80C (for investments), 80D (for medical insurance premiums), and 80G (for donations).
3. Assessment: Defines procedures for assessing taxable income, filing returns, and audits.
4. TDS (Tax Deducted at Source): Mandates deduction of tax at source by payers before making certain payments.
5. Capital gains: Regulates tax on profits from the sale of assets.
6. Penalties and appeals: Outlines penalties for non-compliance and procedures for appeals.

These provisions ensure clarity and compliance in income tax matters for individuals and businesses alike.

Main objectives of the Income Tax Act of 1961

1. Comprehensive framework: The Income Tax Act 1961 forms the backbone of tax administration in India, governing the levying, collecting, and recovery of taxes.
2. Multifaceted objectives: It aims to promote price stability, achieve full employment, foster economic development, mitigate balance of payment difficulties, and control cyclical fluctuations.
3. Regulatory role: Through its rules and regulations, the Act contributes to stabilising prices, managing private spending, and addressing inflation concerns.

Scope of the Income Tax Act of 1961

Under the Income Tax Act, 1961, the tax liability is determined based on an assessee’s:

• Residential status
  and

• The source of income

Usually, there are three types of taxpayers based on residency:

• Resident and Ordinarily Resident (ROR)

• Resident but Not Ordinarily Resident (RNOR)

• Non-Resident (NR)

Now, different types of income are taxed differently for each group. Let’s understand how through the table below:

Type of income	Resident and Ordinarily Resident (ROR)	Resident but Not Ordinarily Resident (RNOR)	Non-Resident (NR)
Income earned in India (Accrued)	Taxable	Taxable	Taxable
Income received or considered received in India	Taxable	Taxable	Taxable
Foreign income brought into India (earned earlier)	Not taxable	Not taxable	Not taxable
Income earned outside India from a business/ profession inside India	Taxable	Taxable	Not taxable
Income earned outside India from a business/ profession outside India	Taxable	Not taxable	Not taxable

 

Features of the Income Tax Act of 1961

Here are some salient features of the Income Tax Act of 1961:

1. Direct tax: Income tax is a form of direct tax that must be borne by individual taxpayers. It cannot be transferred to another individual.
2. Central government control: The Central Government of India oversees income tax administration and collection.
3. Applicability: The Act applies to the taxpayer's income earned in the previous year.

Application of the Income Tax Act

The Income Tax Act, 1961, is followed and applied across India through a combination of:

• Rules

• Laws

• Court decisions

• Government announcements

These supporting systems ensure minimum revenue leakage and better management of public money. Let’s understand in detail how this Act is implemented:

1. Income Tax Rules, 1962

The Central Board of Direct Taxes (CBDT) created the Income Tax Rules, 1962, to enforce income tax laws. These rules explain how different sections of the Act should be applied in real situations.

They provide clear instructions to taxpayers and tax officers on how to follow the Act correctly.

2. Finance Act

Every year (usually in February), the Ministry of Finance introduces a Finance Bill in Parliament. This bill proposes changes to tax laws, such as:

• Increase/ decrease of corporate tax rates

• Changes in income tax slabs

• Updates in surcharge and cess rates

• Policy amendments, and more

After discussions in both the Lok Sabha and Rajya Sabha, the bill must be approved by the President. Once approved, it becomes the Finance Act and officially changes the tax rules.

3. Judicial announcements

Sometimes, there are disputes or confusion regarding how tax laws should be interpreted. In such cases, the Supreme Court of India steps in to make final decisions. These judgments must be followed by everyone in the country.

4. Government notifications and circulars

The government and the CBDT regularly issue notifications and circulars. These are official explanations that clear doubts about the meaning or application of tax laws.

They guide both taxpayers and tax officers. By issuing them, CBDT also tries to improve transparency about procedures in the Income Tax Act.

How to calculate income tax in India

To calculate income tax in India:

1. Determine your total income from all sources.
2. Subtract applicable deductions and exemptions to arrive at the taxable income.
3. Refer to the income tax slab rates to ascertain the tax liability based on your income bracket.
4. Apply the relevant surcharge and cess as per your income level.
5. Finally, subtract any taxes already paid through TDS or advance tax to arrive at the final tax payable or refundable amount.

Important considerations of the Income Tax Act of 1961

The Income Tax Act of 1961, a comprehensive statute governing income tax in India, encompasses several critical aspects:

1. Taxation types: It covers both direct taxes on various income sources and indirect taxes applicable during the sale of goods and services.

2. Structure: With 298 sections distributed across 23 chapters, it comprehensively addresses all taxation-related matters.

3. Deductions: The act allows deductions, albeit subject to maximum limits within a financial year.

4. Amendments: It undergoes periodic revisions to accommodate evolving economic conditions.

Residential status: Tax liability hinges on the taxpayer's residential status.

Who Is Liable to Pay Income Tax?

Under the Income Tax Act, not just individuals but several different types of entities are considered “persons” who are required to pay income tax. As per Section 2(31) of the Income Tax Act, below are different types of persons who are legally responsible to pay tax on their income:

• Individual

• Hindu Undivided Family (HUF)

• Company

• Firm

• Association of Persons (AOP) or Body of Individuals (BOI)

• Local authority

• Artificial juridical person
  

Thus, any person or entity that earns income in India (whether it's an individual, a company, or a group) must pay income tax based on their earnings and status under the Income Tax Act.

Important Sections of the Income Tax Act 1961

The Income Tax Act, 1961 provides several sections through which individuals can reduce their tax burden through deductions. These deductions are allowed for specific types of expenses and investments made during the financial year. Below are some key sections that every taxpayer should know:

Section 80C

Section 80C is one of the most commonly used sections to save tax. Under this section, taxpayers can claim a deduction of up to Rs. 1.5 lakh in a financial year by investing in:

• Public Provident Fund (PPF)

• Life Insurance Premiums

• Employee Provident Fund (EPF)

• National Savings Certificates (NSC)

• 5-year fixed deposits with banks

• Paying tuition fees for children

It also allows deduction for payments made towards principal repayment of home loans.

Section 80CCD

This section provides additional benefits beyond Section 80C. If you invest in the National Pension System (NPS) or Atal Pension Yojana (APY), you can claim a further deduction under Section 80CCD(1B), up to Rs. 50,000.

Please note that this deduction is over and above the Rs. 1.5 lakh limit under Section 80C.

Section 80D

Under this section, you can claim deductions on premiums paid for health insurance. The maximum deduction is Rs. 25,000 for self, spouse, and dependent children.

If you are also paying the premium for your parents, you can claim an extra Rs. 25,000. Furthermore, if your parents are senior citizens (aged 60 or above), this additional deduction limit increases to Rs. 50,000.

Section 80DD

Section 80DD is useful for taxpayers who are taking care of family members (spouse, children, parents, or siblings) with a disability. You can claim a fixed deduction of Rs. 75,000 if the dependent has a disability (40% or more).

For severe disability (80% or more), the deduction goes up to Rs. 1.25 lakh. The deduction is allowed for medical expenses, such as:

• Nursing and rehabilitation
  or

• Insurance bought for the dependent's benefit

Section 80DDB

Under this section, you can claim deductions for medical expenses incurred on the treatment of specific serious illnesses such as:

• Cancer

• Kidney failure

• Neurological diseases, and more.

This section covers you or your dependent family members (like parents, spouse, children, or siblings). The maximum deduction is Rs. 40,000, which increases to Rs. 1 lakh if the patient is a senior citizen. A doctor’s certificate is required to claim this benefit.

Section 80E

Under this section, you can claim a deduction on the interest paid on education loans taken for higher studies. There is no upper limit for this deduction. You can claim this benefit for up to 8 years starting from the year you begin repaying the loan.

The loan can be taken for self, spouse, children, or a student for whom you are the legal guardian.

Section 80TTA

This section allows individuals and Hindu Undivided Families (HUFs) to claim a deduction of up to Rs. 10,000 per year on interest earned from savings accounts held in:

• Banks

• Post offices

• Co-operative banks

Please note that this section does not cover interest earned on fixed deposits or recurring deposits. Only interest from savings accounts qualifies for this benefit.

Section 80U

Section 80U is for individuals who themselves have a disability. The deduction amount is Rs. 75,000 for normal disability and Rs. 1.25 lakh for severe disability (80% or more).

Unlike Section 80DD (which applies to dependents), this section benefits the person with the disability directly. To claim the deduction, a medical certificate is needed from a certified authority.

Will April Salary Be Taxed Under New Bill Or 1961 Act

The April salary for the financial year 2025–26 will not be taxed under the new income tax bill. Instead, it will continue to be governed by the existing Income Tax Act of 1961.

That’s because the new income tax bill (although proposed) is still under review by a 31-member panel from the Lok Sabha and has not yet become law. The panel is currently examining the bill’s contents. It is expected to submit its report during the upcoming Monsoon session of Parliament.

Even though the new financial year began on April 1, 2025, and several favourable tax slab changes have been introduced under the new tax regime, these changes are still being implemented under the Income Tax Act, 1961 framework.

Furthermore, the new Income Tax Bill, 2025 (meant to replace the 1961 Act, if passed) is expected to come into effect on April 1, 2026. Until then, all incomes earned and taxes paid in the 2025–26 financial year, including April salaries, will follow the Income Tax Act of 1961.

Conclusion

The Income Tax Act of 1961 provides a foundational structure for the administration of income tax across India, offering clarity and guidelines on various tax-related issues. This act not only supports the government's fiscal policies but also offers significant advantages to individuals, particularly those looking to purchase homes. By leveraging the benefits under this act, potential homeowners can substantially reduce their tax burden through smart investment in real estate. Opting for a Bajaj Housing Finance Home Loan can further enhance this advantage, offering tailored, cost-effective financing options that make acquiring a home more accessible and financially viable. Understanding and utilising these financial and tax mechanisms can lead to substantial long-term benefits, reinforcing the importance of comprehending such comprehensive legislation in achieving financial security and fulfilling homeownership dreams.